In a recent blog Dr. Steenbarger talked about a vital skill for the intraday trader, reading the tape. Dr. Steenbarger, aka the godfather of modern trading psychology, wrote: “My experience is that an understanding of (and ability to read) order flow is one important factor that separates the older, successful generation of daytraders from the newbies who only know simple chart patterns and indicator readings.” I am one from this older generation of intraday traders. And I thought this old-timer could share his thoughts on reading the tape and how it impacts the developing intraday trader.
In the past I have disappointingly heard developing traders state,”I am just going to focus on the charts going forward. I can’t read the tape.” I have heard this uttered on numerous occasions. Not one of these individuals became successful traders.
Recently, our newest class has moved from the first part of our training to the second part, Trader Development. After the Close we answered their questions and discussed what was important on Day 6 of their live trading career. (Oh to be young again. What was I doing on Day 6 of my trading career?) And one of our promising traders discussed a trailing stop for a MS trade today. Trailing stop? My impression was this talented new trader had trouble reading the tape so was experimenting with these trailing stops to minimize this weakness. This is not the right approach. I counseled to continue working on the skill of reading the tape and to sell the stock on the offer when the tape showed weakness. And I did so because this is what an older generation intraday trader, like myself, does.
And I offered an analogy about not learning how to read the tape. To me not learning this skill is like a basketball player not working on their free throws. This athlete just decides to keep clanging their free throws and give up some easy points. This same new trader offered a better analogy. (Hey we hire smart new traders. Obviously this analogy was much better than mine. In the future I will take creative license to just use his idea as my own. After all what is the point of being a partner if you can’t steal the analogies from your trainees.) Back to this better analogy from the youngster who just started trading. Not developing this skill is like the amateur golfer hitting only irons during his round because he never learns to hit driver.
I like that.
Still not convinced? Let’s bring is some famous market players for further persuasion.
Exhibit A: Steve Cohen of SAC Capital: “…everything I do today has its roots in those early tape-reading experiences.”
Exhibit B: Jesse Livermore: “A battle goes on in the stock market and the tape is your telescope. You can depend upon it seven out of ten cases.”
Exhibit C: Linda Rascheke: “If you can learn to follow the price action, you will be two steps ahead of the game….”
Exhibit D: Paul Tudor Jones: “…..at the end of the day, I am a slave to the tape and proud of it.”
So learn to read the tape. It will help you become a consistently profitable trader. It will give you an edge over other intraday traders.
Best of luck with your trading! Don’t forget to follow us on Twitter!
14 Comments on “Reading the Tape”
This is probably an amateur question, but what do you look at to watch the order flow? A level 2 screen?
Thanks
This is probably an amateur question, but what do you look at to watch the order flow? A level 2 screen?
Thanks
Tape reading by necessity still exists in Indian Brokerage trading rooms where number of Day Traders are bunched up at one Screen.I normally use order depth, Volume, VWAP, Open Price, Action at PDH, PDL as some proxies for Tape reading.How to identify significant levels or inflection points without the use of software like Market Delta or Market Profile.Is it possible to profitably trade with confidence without any charting or Market screening software as I am forced to trade in Brokerages
Tape reading by necessity still exists in Indian Brokerage trading rooms where number of Day Traders are bunched up at one Screen.I normally use order depth, Volume, VWAP, Open Price, Action at PDH, PDL as some proxies for Tape reading.How to identify significant levels or inflection points without the use of software like Market Delta or Market Profile.Is it possible to profitably trade with confidence without any charting or Market screening software as I am forced to trade in Brokerages
Could you explain what you mean when you say “read the tape”? Watching price action? Could you give me an example of something you would watch for? I watch price action a lot and I’ve learned some things from watching but I’m not sure if that’s what you mean (not familiar with the lingo). Thanks.
Could you explain what you mean when you say “read the tape”? Watching price action? Could you give me an example of something you would watch for? I watch price action a lot and I’ve learned some things from watching but I’m not sure if that’s what you mean (not familiar with the lingo). Thanks.
This is a great blog, I am so sorry I had to discover it so late.
Reading the tape si also tricky, because if you use the market depth, nyse openbook you can be fooled. Let’s say that some big guys are terrible bored on their trading desks and say: ‘let’s plays with some sizez in the openbook’ – ‘what an excellent ideea!’.
And here is the tough one: how can you separate the real orders from the fake ones, or how do you manage to get out quick when you have a long position with a lot of sizez in the bid shown in the openbook, and then boom! all of the sudden the sizez are on the short side and your stock is crashing?
This is a great blog, I am so sorry I had to discover it so late.
Reading the tape si also tricky, because if you use the market depth, nyse openbook you can be fooled. Let’s say that some big guys are terrible bored on their trading desks and say: ‘let’s plays with some sizez in the openbook’ – ‘what an excellent ideea!’.
And here is the tough one: how can you separate the real orders from the fake ones, or how do you manage to get out quick when you have a long position with a lot of sizez in the bid shown in the openbook, and then boom! all of the sudden the sizez are on the short side and your stock is crashing?
reading the tape is kind of tricky because of the lack of good material to study. Without knowing what to look for we end up just looking for dancing number on the screen.
Also, even in your blog I sometimes get confused about what is reading the tape and what is watching the order flow…
reading the tape is kind of tricky because of the lack of good material to study. Without knowing what to look for we end up just looking for dancing number on the screen.
Also, even in your blog I sometimes get confused about what is reading the tape and what is watching the order flow…
it is necessary to read the tape e.g. I traded SOL today and it looked like it was going to breakout at 6.19 which it had tested previously and was the early morning high. I read the tape and their was size on the offer at .19, was it real or fake I don’t know and I don’t care but what I DID NOTICE was that the prints were lethargic at that level. When it did break .19 it went .05 cents and there was size on the offer again at .25 (same seller? maybe). It tried to rally beyond that .24 level twice after coming back down and testing .19. Noticing that it wasn’t getting the speed in the tape or that offers were lifting, I got out at breakeven. I also did not see large volume come into the breakout to really push it higher. It also had been up for 3 days. Market was neutral after a big run of 12 up days. You really need to read the tape at important inflection points on a chart because the reverse engineering algo is to break a level to suck in longs/shorts and then reverse it i.e. bull/bear traps. The reverse is that charts can help tape reading i.e. LMT today was offering heavy at 74 looking like a good short but if you draw a horizontal line across a daily chart from the mid Dec. lows you see a support level the could be the right shoulder of a reverse head & shoulders. LMT is below 74.20 which is the exact lows and it closed below that area. It will be an important level on Monday. Anyway I digress, tape reading is essential.
it is necessary to read the tape e.g. I traded SOL today and it looked like it was going to breakout at 6.19 which it had tested previously and was the early morning high. I read the tape and their was size on the offer at .19, was it real or fake I don’t know and I don’t care but what I DID NOTICE was that the prints were lethargic at that level. When it did break .19 it went .05 cents and there was size on the offer again at .25 (same seller? maybe). It tried to rally beyond that .24 level twice after coming back down and testing .19. Noticing that it wasn’t getting the speed in the tape or that offers were lifting, I got out at breakeven. I also did not see large volume come into the breakout to really push it higher. It also had been up for 3 days. Market was neutral after a big run of 12 up days. You really need to read the tape at important inflection points on a chart because the reverse engineering algo is to break a level to suck in longs/shorts and then reverse it i.e. bull/bear traps. The reverse is that charts can help tape reading i.e. LMT today was offering heavy at 74 looking like a good short but if you draw a horizontal line across a daily chart from the mid Dec. lows you see a support level the could be the right shoulder of a reverse head & shoulders. LMT is below 74.20 which is the exact lows and it closed below that area. It will be an important level on Monday. Anyway I digress, tape reading is essential.
Tom- May i ask? What do you use to read the tape? Is there a specific platform you use or is it the level 2 screen?
Tom- May i ask? What do you use to read the tape? Is there a specific platform you use or is it the level 2 screen?